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TMI Blog2021 (11) TMI 1173X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 19,70,11,810/- per the modified return of income filed by the Appellant. In so doing, the Ld. AO has erred in making an addition of Rs. 24,47,51,449/- in the arm's length price of international transactions entered by the Appellant with its associated enterprises ("AEs"). 2. That in making the aforesaid addition, the Ld. AO has erred in making a reference under section 92CA(1) of the Act to the Ld. Transfer Pricing Officer ("TPO") on the following amongst other grounds, rendering the order of the Ld. TPO as unsustainable both in law and on facts: 2.1 As the reference made by the Ld. AO to the Ld. TPO is not in accordance with the provisions of Section 92CA(1) of the Act; and 2.2 As no opportunity of being heard was granted at any stage of the proceedings for this purpose, whether at the proposal stage or even later at the time of grant of approval. 3. The Ld. TPO has erred in making the transfer pricing adjustment without establishing the existence of any one of the four pre-conditions provided in section 92C(3) of the Act, which is a mandatory requirement for making an adjustment under section 92CA(3) of the Act. 4. The Ld. TPO has disregarded the transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion rate; and held that TNMM with Berry ratio (modified form of OP/OPEX) as the PLI should be accepted as the most appropriate method; 6.3 the directions of the Hon'ble High Court of Delhi in Appellant's own case for AY 2007-08 to AY 2010-11 that in case the average rate of commission earned from third parties was to be considered as arm's length price for indenting transactions with the AEs, it had to be established that there is no significant variation in the rate of commission between different products and without conducting any such enquiry, such average rate of commission could not be adopted as arm's length; and 6.4 the transfer pricing approach agreed upon in the Bilateral Advance Pricing Agreement ("BAPA") signed between the Appellant and the Central Board of Direct Taxes ("CBDT"), where TNMM has been selected as the most appropriate method with OP/OPEX as the PLI for similar transactions with Sumitomo Corporation Japan. 7. The Ld. DRP / TPO has erred in applying and computing ALP for indenting transactions by applying 3.36 per cent commission rate (by first applying 2.92 per cent and then adding 0.44 per cent based on OP/OPEX of comparable compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... failed to appreciate that the OP/OPEX should be determined using the actual figures reflected in the profit and loss account. Since the gross profit and operating expenses are undisputed, the operating expenses should be allocated in the ratio of gross profit of each segment and not by assuming an arbitrary OP/OPEX for non-AE segment. 9. The addition of INR 3,16,09,462/- to the total income of the Appellant on protective basis is completely misconceived both in law and on facts. The Ld. DRP / TPO erred in making an adjustment on protective basis in respect of an issue on which substantive addition has also been made, which is not permissible in law as the concept of substantive and protective adjustment is relevant only when an income is to be added in the hands of more than one taxpayer. This is without prejudice to the contention that TIM MM with Berry ratio (modified form of OP/OPEX) as the PLI should be accepted as the most appropriate method for determining ALP of the international transactions entered into by the Appellant in a proper manner, as has been upheld by the Hon'ble ITAT in earlier years, rather than the CUP method. 10. That on the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come on 18.10.2016 and offered the income arising from transactions with Sumitomo Corporation, Japan. However, the transactions with other AEs other than Sumitomo Corporation, Japan, were retained. The ld. Transfer Pricing Officer accepted the ALP of transactions with Sumitomo Corporation, Japan, and all other trading transactions. Now the only dispute remains is with respect to the earning of the commission income with its Associated Enterprises other than Sumitomo Corporation, Japan. The ld. Transfer Pricing Officer passed an order under Section 92CA (3) on 31.10.2019. The ld. TPO noted that the BAPA Agreement provides ACP of the commission of 22.5% to 29.5%. The Arms Length margin of the AEs other than Japan should be taken at 26%. He selected 11 comparables and found average third PLI 24.35%. He applied Arms Length percentage of margin at 26% on operating expenses of Rs.1283,94,65,686/- and thereafter determined the difference between operating cost and Arms Length price of Rs.333,48,06,125/-. He noted that international transactions are to the extent of Rs.65,98,41,761/- and, therefore, proportionate adjustment @ 5.14% was determined at Rs.17,13,35,198/-. He proposed the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ached an amount of Rs.1283,32,15,727/-. To this figure he applied the profit level indicator of operating profit to operating expenses of 15.07% and computed the Arms Length income to Rs.1476,71,81,337/-. With respect to the commission received from the Associated Enterprise, he derived the commission income by making an addition of FOB value of goods at the revised operating income of Rs.1284,29,20,639/-. Based on the above working he calculated the difference between revised operating income and the Arms Length income of Rs.192,42,60,698/-. He determined that 1.64% is the proportion of international transaction and applied it to the revised operating income and calculated the transfer pricing adjustment of Rs.3,16,09,462/-. Thus, on CUP basis he made addition of Rs.21,31,41,987/- adopting CUP method and on protective basis adopted TNMM method Rs.3,16,09,462/-. 12 Accordingly the final assessment order was passed on 30th April 2021 wherein addition on substantive basis was made of Rs.21,31,41,987/- and on protective basis Rs.3,16,09,462/-. The total income of the assessee was determined at Rs.44,17,63,260/-. Against this order, the assessee is aggrieved. 13 The ld. AR submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. TPO and DRP. 18 The ld. DR referred to the order of the ld. DRP. He extensively referred to para No. 6 of the order of the ld. DRP with respect to the substantive adjustment and para No. 7 with respect to the protective adjustment and supported it. 19 With respect to the objection of making an addition of FOB value to the commission income and also to the operating cost of the assessee, he submitted that the commission is earned on FOB value and, therefore, it is required to be added in the income and then also required to be considered as cost of the assessee to work out the correct margin. 20 With respect to the comparables, he relied on the order of the ld. Transfer Pricing Officer. 21 In rejoinder, the ld. AR submitted that the issue is covered in favour of the assessee by the earlier decisions of the co-ordinate bench where the CUP method is rejected. He submitted that computation of adjustment on the basis of TNMM method is faulty. He stated that the FOB value is neither an income nor an expense of the assessee. With respect to the comparables, he reiterated his arguments already advanced. He submitted that the binding directions of the DRP are not followed by the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y different and the geographies involved are Switzerland, Singapore, Thailand and Japan whereas non AE transactions are with Suzuki Motorcycle India Pvt. Ltd. and Bajaj Auto Ltd in India. Likewise under the product 'chemicals' the assessee has undertaken 1044 transaction with AE and only 112 transaction with non AE and the commission with AE is 1.28%, whereas non AE it is 2.26%. Similarly, the products dealt with AE and non-AE under this segment are quite different and geography involved with AE are Spain, Japan, Italy, Switzerland, Thailand, whereas with non-AE it is India. Likewise in 'electronics' segment the transaction undertaken with the AE are 253, whereas with the non AE it is 5 and again not only the products are different but also geographical location are different with that of non-AE which are mostly with Indian parties and all AE transactions are with various foreign countries. Similar differences are noted in all across 10 to 11 products dealt by the assessee with AEs and non AEs. The total number of transactions with the AE during the year was 3,145 and with non AE it was only 371. Thus, apparently there is a huge difference in volume on FOB basis and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has taken OP/TC as PLI. Further, it has been brought to our notice that from the Assessment Years 2011-12 to 2018-19 under the MAP agreement it has been agreed that TNMM should be the most appropriate method to determine the ALP of the international transaction of the indent keeping into the fact that assessee is a low risk service provider and there is no change in FAR right from Assessment Years 2003-04 to 2018-19. Once TNMM has been accepted under the similar FAR, we do not find any reason to deviate by adopting some other method. Otherwise also we have held that CUP method cannot be applied and other methods admittedly are incapable of capturing the true arm's length result and therefore, we hold that TNMM should be taken as a most appropriate method for benchmarking the said transaction." 23 In view of the above facts and the binding precedents in assessee's own case, we respectfully following the same hold that the CUP method cannot be applied in the case of the assessee for making an adjustment to the commission income of the assessee. The co- ordinate bench has also held that TNMM is the only method, which can be applied. Accordingly, the addition made by the ld. Tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the arm's-length price of the indent commission on by the assessee from associated enterprises other than Japan. 27 We find that the coordinate bench in eight prior assessment years has held that the transactional net margin method with berry ratio as the profit level indicator should be adopted. Therefore, respectfully following the coordinate bench in assessee's own case for earlier years we find that only the berry ratio needs to be adopted. Further the tribunal in earlier year has also held that FO be value of goods is the cost and revenue of the buyer and the seller and not the commission agent. Therefore, such an adjustment could not have been made. 28 It is also argued that the segmental accounts prepared by the learned transfer-pricing officer with respect to the operating expenses, certain assumptions have been made. There is no justification given that how the operating expenditure amounting to Rs. 924,309,577 has been bifurcated by the learned transfer-pricing officer with respect to the transactions with Sumitomo Corp Japan, other associated enterprises other than Japan and independent parties. 29 Further with respect to selection of the comparables, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2016-17 identical to that of assessment year 2015-16. Their arguments also remain the same. 38 We find that the assessee filed its original return of income on 28/11/2016 declaring a total taxable income of Rs. 147,791,830/-. As assessee has entered into the similar international transactions the matter was referred to the learned transfer-pricing officer for determination of the arm's-length price. The learned transfer pricing officer passed an order u/s 92CA (3) of the act on 31/10/2019 wherein the total addition of Rs. 396,080,318 was made to the total income of the assessee on account of adjustment to the value of international transaction entered into by the assessee. The learned transfer pricing officer made an adjustment of Rs. 166,639,618/- on substantive basis and further adjustment of Rs. 229,440,700 on account of protective basis. The draft assessment order was passed on 12/12/2019 wherein the total income of the assessee was computed at Rs. 396,080,318. The objections were filed before the learned dispute resolution panel. The learned DRP passed directions on 10/1/2020. Accordingly the learned dispute resolution panel proposed the substantive addition of Rs. 211,237, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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